The Charles Schwab Corporation (SCHW) turned the discount brokerage industry upside down in October 2019, cutting commissions on equity and options trades to zero.(See also: Schwab Cuts Base Commissions to Zero.) The move, intended to challenge Robinhood and other rapidly growing internet innovators, was matched quickly by other competitors, setting off an industry decline that dropped shares of TD Ameritrade Holding Corporation (AMTD) and E*TRADE Financial Corporation (ETFC) to multi-year lows.

Schwab followed up with November's blockbuster news that it would acquire Ameritrade in a $26 billion all-stock transaction that is expected to close in the second half of 2020. The one-two punch has had a tremendously positive effect on Schwab stock, ending a six-month decline that dropped America's largest discount brokerage to the lowest low since 2016. More importantly, it is now positioned perfectly for impressive 2020 returns.

The brokerage industry has struggled with lower trading volumes in recent years, driven by investors transitioning out of individual stocks and into passive management schemes that buy and sell popular sector finds. The rapid rise of artificial intelligence has also taken a toll, with algorithms undercutting traditional managed accounts, buying and selling funds within the parameters of pre-chosen allocations and goals.

Schwab's automated "Intelligent Portfolios" now comprise a large share of investor capital, while the upcoming acquisition will allow the company to scale operations even farther, using its enormous size to lower third-party transaction costs. The move is likely to signal the demise of several start-up and traditional rivals in coming years, establishing the financial powerhouse as the Google of discount brokers

SCHW Long-Term Chart (1990 – 2019)

Long-term chart showing the share price performance of The Charles Schwab Corporation (SCHW)
TradingView.com 

The stock turned sharply higher through the 1990s, posting seven stock splits into the April 1999 high at $51.69. That marked the highest high for the next 19 years, ahead of a bear market decline that relinquished more than 85% of Schwab's value into March 2003. That marked a historic buying opportunity, ahead of a healthy mid-decade advance that stalled at the 50% sell-off retracement level in the summer of 2008. It posted a higher low in the low teens during the economic collapse but undercut that level in 2011, dropping to a six-year low at $10.56.

Committed buyers lifted the stock through 2008 resistance in 2014, but the rally made little headway, topping out in the mid-$30s just before the August 2015 mini flash crash. It posted a two-year low in February 2016 and turned higher once again, breaking out to new highs in a strong uptrend that completed a round trip into the 1999 high in December 2017. A 2018 breakout attempt failed after posting an all-time high at $60.22, setting off an intermediate correction that continued into the October 2019 commission announcement.

SCHW Short-Term Chart (2017 – 2019)

Short-term chart showing the share price performance of The Charles Schwab Corporation (SCHW)
TradingView.com

The monthly stochastics oscillator fell to the deepest oversold reading since 2011 in 2018 and crossed over, establishing a long-term buy cycle that is just now reaching the overbought zone. This placement predicts that additional gains are likely in the next one to three months, perhaps lifting the stock back above the 1999 high (red line). More importantly, it is now digesting the last remnants of multi-decade resistance, raising the odds for a historic breakout in 2020.

The on-balance volume (OBV) accumulation-distribution indicator broke out to a new high after the October catalyst while price gapped up to the .618 Fibonacci retracement level of the 2018 into 2019 decline. This marks a common reversal zone, so a downturn and gap fill is possible here, with the 50-day exponential moving average (EMA) now lifting into that support level. Taken together, a pullback into the mid-$40s could offer an excellent buying opportunity, ahead of rapid gains in the new decade.

The Bottom Line

Charles Schwab could dominate the discount brokerage industry in 2020 and beyond, making the stock a top pick for investors seeking superior returns.

Disclosure: The author held no positions in the aforementioned securities at the time of publication but holds two family accounts at the brokerage.